ACFI 100 Exam 1

Which of the following is not an example of a common control activity?

Collusion

Which of the following formulas yields the return on assets ratio?

Net income divided by total assets

Public companies under the jurisdiction of the Securities and Exchange Commission are required by law to hire a certified public accounting firm (independent auditor) to assess whether their published financial statements are in compliance with Generally Accepted Accounting Principles (GAAP). This statement is

True

Segregation of duties in an organization should be required to reduce the likelihood of theft.

True

The income statement presents

a comparison of the benefits and the sacrifices a company experiences from its operations.

The balance sheet presents

a list of a company's assets and the sources of those assets.

The statement of changes in stockholders' equity presents

an explanation of the changes in the beginning and ending balances of stockholders' equity.

On December 31, Year 3, Snack, Incorporated adjusted its records to recognize $5,000 of accrued salaries. Based on this information alone, the

balance sheet at the beginning of Year 4 would show $5,000 of accrued salaries payable.

The implementation of an effective internal control system eliminates the possibility of fraud. This statement is

false.

Generally Accepted Accounting Principles (GAAP) are designed to provide guidance for

financial accounting

If total assets increase, then

liabilities, common stock, or retained earnings must increase.

Jefferson Company borrowed $6,000 on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of cash outflow from operating activities that Jefferson would report in Year 1 and Year 2, respectively would be

$0, and $360. Explanation Total annual interest = $6,000 × 0.06 = $360 Since the total amount of interest is paid on the maturity date in Year 2, there would be zero cash outflow in Year 1 and $360 in Year 2.

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. If Marino uses the straight-line method, the amount of depreciation expense recognized on the Year 2 income statement is

$10,000. Depreciation expense per year = (Cost of the asset − Salvage value) ÷ Useful life Depreciation expense per year = ($48,000 Cost − $8,000 Salvage) ÷ 4 Year life = $10,000

Which of the following financial statements is prepared as of a specific date?

Balance Sheet

Internal control is a process designed to ensure

Internal control is designed to ensure all of the items described in the answers.

Based on the fraud triangle, which of the following is not a factor that motivates fraud?

Punishment

Using borrowed money to increase the return on equity is called

financial leverage.

On August 1 of Year 1, Accounting Associates collected $1,200 cash for consulting services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information, the amount of unearned revenue appearing on the December 31, Year 2 balance sheet would be

zero.

Jay Company started Year 2 with a beginning balance of $10,000 in accounts receivable. During the year, revenue on account amounted to $25,000. Cash collections of accounts receivable amounted to $5,000. Expenses for the period were $2,100. The company paid dividends of $450. Based on this information alone, what is the ending balance in accounts receivable for Year 2?

$30,000 Explanation $10,000 beginning balance + $25,000 revenue on account − $5,000 cash collected on accounts receivable = $30,000 ending balance

If a company has total assets of $40,000, sales of $88,000, cost of goods sold of $55,000, and net income of $4,400, what is its return on assets ratio?

11% $4,400 net income ÷ $40,000 total assets = 11%. This means that the company earned $0.11 of income for every dollar of assets that it invested.

Which of the following statements about the materiality concept is not true?

Any error greater than $5,000 is considered material in a financial statement audit.

Accounts payable will appear on which of the following financial statements?

Balance sheet

Accounts receivable will appear on which of the following financial statements?

Balance sheet

Which of the following is normally shown first on the statement of cash flows?

Cash flow from operating activities

The framework that is used to assess the effectiveness of a company's internal control was established by the

Committee of Sponsoring Organizations of the Treadway Commission.

The primary focus of financial statement audits is the discovery of fraud.

False

Paying cash to settle a salaries payable obligation will affect which section of the statement of cash flows?

Operating activities

While independent auditors are responsible to the public they receive compensation for their work from the companies they audit. This statement is

True

Paul Savage purchased a restaurant named Burger Haven from Larry Jones. The purchase would cause the number of reporting entities to

remain constant.

If a company recognizes accrued salary expense

the employees have completed work but have not been paid.

Clayton Company borrowed $6,000 from the State Bank on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest expense that Clayton would report in Year 1 and Year 2, respectively would be

$270, and $90. Explanation The amount of interest expense incurred is computed as follows: Total annual interest = $6,000 × 0.06 = $360 Monthly interest = $360 annual interest ÷ 12 months = $30 Interest expense in Year 1 = $30 per month × 9 months = $270 Nine months of interest was accrued in Year 1. The remaining 3 months is expensed in Year 2. Interest expense in Year 2 = $30 per month × 3 months = $90

If a company has total assets of $800,000, total liabilities of $300,000, total stockholders' equity of $500,000, sales of $400,000, and net income of $80,000, what is its return on equity ratio?

16% $80,000 net income ÷ $500,000 total stockholders' equity = 0.16 or 16%. This means that for every dollar of stockholders' equity the company earns $0.16 of net income.

Mary Company collected cash from an account receivable. The recognition of the cash collection will affect which of the following financial statements?

Balance sheet and the statement of cash flows

Which of the following is an example of revenue?

Cash received from customers at the time services were provided

Which of the following is an internal control procedure used to safeguard a company's assets?

Depositing cash receipts in a bank on a timely basis Segregation of duties Preparing a bank reconciliation All of these answer choices are correct Correct

An unqualified audit opinion suggests that all aspects financial statements are in compliance with generally accepted accounting principles (GAAP). This statement is

False

Which of the following types of businesses require financial information to operate effectively?

For profit businesses Governmental entities Non-profit businesses All of these businesses require financial information Correct.

Which of the following is not a commonly accepted internal control activity?

Hiring only college graduates

Net income appears on which of the following financial statements?

Income Statement and Statement of Changes in Stockholders' Equity

Yang Company recognized accrued salary expense. The recognition will affect which of the following financial statements?

Income statement and the balance sheet

Which of the following is not an internal control procedure designed to safeguard cash?

Keep cash in locations that are accessible by multiple employees

Which of the following entities is responsible for establishing auditing standards?

The Public Company Accounting Oversight Board.

Which of the following statements regarding the SEC is not true?

The SEC is a private professional organization.

Which of the following statements is true?

To determine the book value of a long-term asset, the balance in the accumulated depreciation account must be subtracted from cost of the asset. Accumulated depreciation is a contra asset account. The amount of depreciation expense recognized each year is added to the beginning balance of accumulated depreciation account to determine the ending balance of the account. All of the statements are true. Correct

Which of the following formulas yields the debt to assets ratio?

Total liabilities (debt) divided by total assets

A company using accrual accounting may report revenue on the income statement even if it does not collect cash. This statement is

True

Accrued interest expense will appear on the income statement but not on the statement of cash flows. This statement is

True

Cash is difficult to protect because it is easy to transfer and its ownership difficult to prove. These statements are

True

Even a good system of internal controls can be circumvented by collusion among employees. Group starts

True

Preparing a bank reconciliation is a control activity.

True

Simpson Company paid cash to purchase land. This event is

an asset exchange transaction.

Sims Company earned cash revenue by providing services to its customers. This event is

an asset source transaction.

Lawyers Incorporated accepted a $12,000 retainer for which the company agreed to provide services in the future. Recognizing this event would

defer the recognition of revenue. cause the company's assets to increase. cause the company's liabilities to increase. All of the answers are correct. Correct

When a company purchases prepaid rent, it

defers recognition of rent expense.

A deferral

exists when a company pays cash before recognizing the associated expense.

Sarbanes Oxley is a major fraud case that motivated Congress to establish rules governing internal control. This statement is

false

Liabilities

represent obligations to repay debts. may increase when assets increase. are found on the claims side of the accounting equation. All of the answers are characteristics of liabilities.Correct

When a company earns revenue on account

the asset account, accounts receivable, increases. a revenue account increases. liabilities are not affected. All of the answers are correct. Correct